Tuesday, February 02, 2010

Walk away

Back in November of 2009 I mentioned this article where a college professor argued for homeowners who are barely treading water to jump ship and walk away from their homes.

I was a bit shocked when I read this considering this came from an academic. I also view foreclosure as the atom bomb of real estate. It puts an end to everything and the financial ramifications can be present for years. A foreclosure pretty shows up anywhere credit checks are required.

There is also a huge social stigma attached to it. The F in foreclosure pretty much means failure. And losing a home to foreclosure says the world that you have no idea how to control your life.

I stopped paying my $1,450-a-month mortgage on my 200-year-old, four-bedroom home in September 2008 -- after making the hard decision to walk away from my mortgage because it is hopelessly underwater.

It is not an easy decision to walk away from your home, and in the beginning I actually felt like a loser. That was the hardest part.

You see, I was raised to live up to my financial responsibilities. I was taught plenty about personal responsibility. But in this case I had no practical solutions to my financial dilemma -- I lost my job, was turned down for a mortgage modification and owed a lot more than the house is worth.

From what I can gather Ms. Speer is a responsible person who got slammed with unemployment, medical bills and being a single parent. Basically stuck in the proverbial rock and hard place. And she has no shame. And why should she? A lot of these factors were completely out of her control.

NEW YORK — Tishman Speyer Properties walks away from 11,232 Manhattan apartments because it can't pay its mortgage. That's good business.

Rick Gilson, a college custodial supervisor in South Dakota, wants to walk away from the mortgage on his mobile home. If he does, he'll be a deadbeat.

Back in the late 1980's when the last real estate bubble popped, a lot of commercial owners simply walked into the bank and turned in their keys. Professionally speaking, a lot of these owners never recovered. Personally, they were fine since they were protected by an LLC or had the proper legal protections in place so their lenders could not go after them for their personal assets.

This looks bad for Tishman, but the way the deal was structured, a fraction of the money that was put in was their own while the rest was OPM. Of course, the investors could slap together a lawsuit but it would probably be futile at best because Tishman probably put the proper fail safes in place so any legal fall out would not come their way.

That is why personal homeowners like Rick Gilson are more at risk because they have no protection at all if they decide to walk away. They can either lose money on a rapidly depreciating asset or face the reality of never being able to get a credit card or cell phone service if they walk away.

As indicated from the link above, walking away from a home has become an industry unto itself with companies providing kits in how to properly give up your home. The only reason why a company like this would exist is if there is demand for these types of services. And demand is waaay up.

So what does this tell us?

Any recovery is going to long, slow and painful.

This is a buyer's market.

This is a great time to talk to the real estate department in any bank.

If you are not one of these people who are walking away, be thankful.

If you one of these people walking away, keep your head up. You are not alone.